CDP CDP Trading Strategies & Execution 2 — Questions and Answers
Question 1: What is a 'synthetic long' position in options trading?
- Buying a call and selling a put at the same strike, replicating a long stock position (Correct answer)
- Buying both a call and a put at different strikes
- Selling a covered call against a long stock position
- Buying a deep in-the-money put option
Correct answer: Buying a call and selling a put at the same strike, replicating a long stock position
A synthetic long is created by buying a call and selling a put at the same strike and expiration, mimicking the payoff profile of holding the underlying stock.
Question 2: What does 'delta-neutral' trading aim to achieve?
- Maximizing delta exposure for directional bets
- Eliminating directional price risk by maintaining a portfolio delta of zero (Correct answer)
- Reducing theta decay to zero
- Maximizing vega exposure to benefit from volatility changes
Correct answer: Eliminating directional price risk by maintaining a portfolio delta of zero
Delta-neutral trading involves constructing a portfolio where the net delta equals zero, meaning the position has no directional sensitivity to small price moves in the underlying.
Question 3: What is an 'iron condor' options strategy?
- Buying a call spread and buying a put spread simultaneously
- Selling a call spread and selling a put spread simultaneously (Correct answer)
- Buying a straddle and selling a strangle
- Buying calls and puts at four different strikes
Correct answer: Selling a call spread and selling a put spread simultaneously
An iron condor involves selling an out-of-the-money call spread and an out-of-the-money put spread, profiting when the underlying stays within a defined price range.
Question 4: What is the effect of 'contango' on a futures trader holding a long position that rolls contracts?
- Rolling costs are negative (trader receives a credit)
- Rolling costs are positive (trader pays more for deferred contracts) (Correct answer)
- No effect on rolling costs
- Rolling costs depend only on interest rates
Correct answer: Rolling costs are positive (trader pays more for deferred contracts)
In contango, deferred futures prices are higher than near-term prices, so rolling a long position means selling cheap near contracts and buying more expensive deferred ones, incurring a roll cost.
Question 5: What is a 'calendar spread' in options trading?
- Buying and selling options at different strike prices but same expiration
- Buying and selling options at the same strike but different expirations (Correct answer)
- Buying calls and puts at different strikes and expirations
- Selling options at multiple strike prices for the same expiration
Correct answer: Buying and selling options at the same strike but different expirations
A calendar spread involves buying and selling options at the same strike price but with different expiration dates, profiting from differences in time decay rates between the two expirations.
Question 6: In a futures market, what does 'open interest' represent?
- The total number of futures contracts traded in a single day
- The total number of outstanding futures contracts that have not been settled (Correct answer)
- The difference between buying and selling volume
- The total value of all futures positions
Correct answer: The total number of outstanding futures contracts that have not been settled
Open interest is the total number of outstanding unsettled futures contracts, where each contract represents a buyer-seller pair that has not yet been offset or delivered.
CDP CDP Trading Strategies & Execution 2
What is a 'synthetic long' position in options trading?